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Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. On today’s daily call, we’re going to talk about the difference between implied volatility rank, IVR and implied volatility percentile, IVP or IV percentile I guess for short. There’s a big difference in the trading community and a lot of people have questions on this, so hopefully we can help answer a lot of those today and just talk about how we look at implied volatility here with these two different metrics. But the first thing you have to understand is why we use these in general. The reason that we use any type of implied volatility ranking or percentile metric is because if you just set an implied volatility level, it's totally arbitrary unless we know ranges and highs and lows. That’s really what it comes down to. If I told you that implied volatility on Apple was say 20% and implied volatility on Google is 20%, that's totally arbitrary. Yes, it’s the same number, but implied volatility on Apple at 20% could be low and implied volatility on Google at 20% could be the highest that we've seen in two years. Without some context of what the range has been for those underlying prices, it's a totally arbitrary argument just to look at individual implied volatility levels. Another example of this just to really drive this home… But it could be real estate. If I told you a house right now is worth $250,000, four bedrooms, three baths, two car garage, etcetera, like standard house, $250,000, depending on where you live in the country right now as I’m even talking about that, you’ve already made a preconceived notion of maybe if that house is underpriced or overpriced. In my area, where I live in Pennsylvania now, if you told me a house is $250,000, I’d be like, “It must be the most beautiful house in the world because that’s really, really expensive for where we live.” Back when we lived in New York and DC, that’s obviously like a condo, like that's a small one bedroom, maybe you got a sink, maybe you got a toilet type of condo. But again, it’s arbitrary without knowing some ranges or boundaries. When it comes to options trading, the first one that we look at and use is IVR which is IV rank. Here’s how IV rank works. If a stock let’s say has had an IV reading between 30 and 60 over the past year, so the lowest reading on that stock was 30, the highest reading on that stock was 60 and if the current reading is 45, then it would have an IV rank of 50. It would be between in the 50th rank, making zero, the zero level 30 and the 100th level, if we rank it at 0 to 100, the highest level being 100 at 60. 45 is right in the middle and that would be a 50 rank. Now that we’ve gotten these ranges, these historical ranges, a low of 30, high of 60, now we can say, “Okay, the stock is ranking about 50 IV right now, middle of the road. It’s not the highest it’s been, it’s not the lowest it’s been, it’s in the middle.” That again, helps us to proceed with a potential strategy. If we are looking for a strategy that could take advantage of high implied volatility or low, this ranking mechanism does that. What IV percentile does or IVP is a totally different calculation and it basically looks at the percentage of days over the last year that implied volatility traded below the current level. Again, the percentage of days over the last year that implied volatility traded basically below the current implied volatility level. If you have an implied volatility percentile of 80, then that would mean that 80% of the time over the last year, implied volatility was lower. That would generally indicate that the stock is at a high level of implied volatility. If today’s current reading then told us that 80% of the time, the stock had lower implied volatility over the last year, that really tells us a lot of information. It tells us that obviously, that the stock is at a high level and that it should or generally should go lower from here. Maybe it has a better chance of going lower from here or trading lower from here. Again, either one of these two, you can use. I think when the argument comes down to like which one is better… I've seen tons of arguments for both of them. Obviously, IV percentile is a much deeper calculation. IV rank has a much easier calculation. What we use here at Option Alpha is we use IV rank a lot. Not that we don't use IV percentile, but we use IV rank. When we plot IV rank and IV percentile, they’re very, very similar on the long-term scale. You plot them across multiple securities, not just the SaP or the Russell or the NASDAQ, but across multiple securities, stocks, ETFs, etcetera for 10 or 15 years, IV rank and IV percentile trend very, very similar. They really do. I mean, when stocks have high implied volatility, it shows up on both IV rank and IV percentile. Now, the readings obviously are going to be different. IV percentile may have a higher reading than IV rank at some periods and vice versa. It could be totally different at some periods versus others. But the reality is that both of these trend together. The key for me is use the same trading metric for everything that you do. If you want to use IV rank because you believe in that better, great! Use IV rank. If you want to use IV percentile, great! Use IV percentile. But don’t use them interchangeably between two different strategies. Don't use IV rank on one trade where you’re looking to buy options for some instance and take advantage of rising implied volatility and then use IV percentile to look to sell options in another instance. It's not the same. It’s not the same calculation. It’s not the same metric. Make sure that you're using the same metric across all of your trading strategies, so that you stay consistent. Again, what we use here at Option Alpha because it’s just easier to use and easier to calculate for back-testing purposes and all that is IV rank. It’s just an easier metric. I don’t think it necessarily skews our data in any one way or direction. I think that over time, they both generally trade and trend the same together. Hopefully that helps out. Hopefully it clears the air on what they each are and how you can use them. As always, if you have any questions, let us know. Hit us up on Facebook, Twitter, Instagram, etcetera. Until next time, happy trading!